The payment made by a corporation to its shareholders, normally as a distribution of profits, is called a dividend. Usually, a corporation can choose to re-invest either the profit or surplus, action named retained earnings or the respective profit can be distributed to shareholders. The distribution of dividends can be made either in cash or the amount can be paid in shares, named as share repurchase.
All compensations, monetary or non-monetary, are considered income and they will be subject to personal income tax in Bulgaria. As such, dividends are among the items classified as taxable income, as well as employment income that includes salary or bonuses, interest income, income from other economic activities, capital gains or rental income. However, reinvested dividends are among the items tax-exempt in Bulgaria. Our lawyers in Bulgaria can present you more details about Bulgaria taxes.
What laws govern the taxation of dividends in Bulgaria?
Dividends received by a Bulgarian company from another Bulgarian company are not taxed. When the dividends are not exempt, they are considered part of the global taxable profits which include the worldwide income for resident companies and the Bulgarian-sourced income for non-resident companies.
In Bulgaria, according to the Corporate Income Tax Act, dividends are subject to a withholding tax of 5 percent rate when distributed to individuals or non-profit entities, as well as to non-residents as long as they are not members of EU or EEA. As long as Special Purpose Investment Vehicles (REITS) distribute the dividends or Non-EU / EEA foreign entities, then the dividend distributed to resident companies are not included in their taxable income. Capital gains from the disposal of shares in subsidiaries are subject to the flat corporate income tax worth 10 percent on the level of the Bulgarian holding company. More information about Bulgaria taxes and especially on dividends tax you can obtain from our Bulgarian attorneys.
What are some of the special conditions for taxation?
In Bulgaria, withholding tax may not be necessary to be paid if shareholders in the Bulgarian companies are tax residents of an EU country and they are not residents of a third state, according to the provisions of a double tax treaty. Moreover, if the shareholders are payers of corporate income tax in their resident state and they are not entitled to any tax exemptions, then they are not subject to withholding tax. This can also apply in case of non-residents that hold 15 % or more of the shares in the Bulgarian company that distributes the dividends for at least two years.
The Parent-Subsidiary Directive applies to companies in Bulgaria and fulfills the role of eliminating taxes that may arise in case of profit distributions between companies in the EU. This is done, as stated above, by eliminating the withholding taxes on dividends applicable to companies that are based in different Member States; it also prevents the double taxation of parent companies on the profits of the subsidiaries they have in other EU states. According to the provisions of the Directive, the types of companies that are included are mutual companies, funds, savings banks, certain co-operatives and associations that have commercial activity. One of our lawyers in Bulgaria can give investors from the EU more details on how these provisions apply.
When a dividend payment is received from a Bulgarian company, the tax is applied at the source, therefore the recipient does not have to report and therefore pay any personal income tax on the dividends. When the said dividend payments are received from foreign entities, they are part of the tax return and they must be reported, as they will be taxed as part of the individual’s annual personal income tax return.
What are the principles of taxation in Bulgaria?
Corporate taxation in Bulgaria
includes a number of taxes, among which the aforementioned withholding tax on dividends that applies in some cases. The main tax for Bulgarian businesses is the corporate income tax
, which has a rate of 10% - one of the lowest in Europe, the main reason why many investors choose to open a business in the country. Other taxes include the payroll tax, the real property tax, social security (with different percentages for both the employer and the employee), the transfer tax, and others as may be applicable in certain business fields (such as for insurance contracts that are subject to a 2% tax on insurance premiums). The value-added tax in Bulgaria applies to the supply of certain types of goods and services and has a standard value of 20%, with a 9% rate for accommodation services and a zero rate for exports and intracommunity supplies.
Our team of tax attorneys in Bulgaria can give you complete details about the Bulgaria taxes, taxation principles, the double tax treaties as well as the Parent-Subsidiary Directive and the Corporate Income Tax Act.
Because of its beneficial taxation system, and the fact that the Parent-Subsidiary Directive and the EU Interest and Royalties Directive apply, Bulgaria is a European country that presents potential as a holding location. When investors base a holding company in Bulgaria, as seen above, the dividends received by the Bulgarian holding are tax exempt when the subsidiary paying the dividends is located in an EU/EEA member state (also including Iceland, Liechtenstein, Norway). Likewise, the dividends paid by the Bulgarian holding to companies in the EU/EEA are exempt from the withholding tax. The capital gains after the disposal of shares in subsidiaries will be subject to the applicable flat corporate income tax rate, payable by the Bulgarian holding company.
Bulgaria signed double taxation treaties with more than 60 countries worldwide in order to avoid double taxation in case of foreign investors who derive income from two different jurisdictions. This measure offers tax relief for companies operating in multiple countries. Along with the double tax treaties, Bulgaria also signed a number of exchange of information protocols in order to have a clear image of the legal entities requesting double taxation relief.
Our lawyers in Bulgaria
help you benefit from the special taxation measures available under these double tax agreements.
In order to benefit from tax relief as applicable under double tax treaties, non-resident companies operating in Bulgaria must submit an application to prove that they are entitled to tax relief.
With what countries has Bulgaria signed double tax treaties?
More than sixty double tax treaties were signed by Bulgaria and other countries in order to avoid double taxation. Some of the older treaties were updated or re-negotiated to allow for more accurate provisions. Examples of double tax treaties that have been updated include those with the United Kingdom, with Austria, Germany or Switzerland. We recommend that investors talk to one of our lawyers in Bulgaria to find out more about a specific double tax agreement and whether or not it was updated to include new regulations.
The countries that have concluded double taxation treaties
with Bulgaria are: Albania, Algeria, Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Iran, Ireland
, Israel, Italy, Japan, Jordon, Kazakhstan, Democratic People’s Republic of Korea, the Republic of Korea, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malta, Morocco, Qatar, Moldova, Mongolia, Netherlands, Norway, Poland, Portugal, Romania, Russian Federation, Spain, Singapore, Slovakia, Slovenia, South Africa, Sweden, Switzerland, Syria, Thailand, Turkey, Ukraine, United Arab Emirates, United Kingdom, United States of America, Uzbekistan, Vietnam, Yugoslavia, Zimbabwe.
Below, we present the three main withholding taxes that are reduced by a double tax treaty:
- 10%: the withholding tax rate for interests as per the treaty with Albania, Belarus, Canada, China, and other countries.
- 5%: the withholding tax on dividends for countries like Bahrain, Croatia, Estonia (with an alternative 0% rate), Lebanon and others.
- 10%: the withholding tax rate for dividends, interest and royalties for countries like Algeria, Belarus, the Czech Republic, Georgia, Greece, Hungary and others.
- 7%: the withholding tax rate for interest in the case of Azerbaijan, Cyprus, and Lebanon.
- 2%: the withholding tax rate for interest in case of the United Arab Emirates; for this jurisdiction, the other withholding taxes on dividends and royalties are also low, at 5%.
- 0%: the withholding tax rate on dividends and interest in the case of Malta.
As seen from the list above, the treaty rates can differ from one jurisdiction to another. Foe some countries, the treaties specify rates of 7.5%, for example in case of the withholding tax on dividends in the treaty with Iran and Israel (in this case, one of the three applicable values). This is why we recommend requesting specialized tax and legal assistance from our team of attorneys in Bulgaria. By doing so, you can make sure that you can clarify any tax issues that may arise when doing business in Bulgaria. Some of the treaties, like that with Saudi Arabia, are pending ones (they are signed but they are not yet in effect).
Please remember that the rates are for payments that are made from Bulgaria to the other treaty jurisdiction. In practice, the rate may be reduced under the domestic law of the country in which the recipient company is based. For more clarification, please refer to our lawyers in Bulgaria. They can also provide more information on how the provisions for the OECD Multilateral Convention to Implement Tax Treaty Measures.
The National Revenue Agency
is the principal tax authority in Bulgaria. Investors Who wish to know more about the Bulgaria taxes
and how their rates can be reduced under a treaty can react out to our attorneys in Bulgaria.
Who benefits from double tax treaties in Bulgaria?
Non-resident companies must submit an application and provide details to prove that they are entitled to tax relief under the special double taxation treaties. The company is required to show that it has its main business office in a state which signed double tax treaties with Bulgaria, must have an income source in Bulgaria and must fulfill certain special requirements. An examination or an audit may be performed in order to verify the information contained in the application.
for which the double tax treaty applies in case of Bulgaria include the tax on total income and the tax on profits. For other countries, the DTA will usually cover the personal income tax and the corporate income tax, as they are defined in that specific jurisdiction. The agreement also provides a description of a permanent establishment, as the term will be used for the purpose of avoiding double taxation. For corporations, a permanent establishment that may benefit from the provisions of the DTA is a place of management, a branch, office, factory or workshop, construction site or building site as well as mine, oil or gas mine.
Our Bulgarian lawyers can offer you a complete company check-up to make sure that your company can benefit from tax relief under double taxation treaties and they offer information about Bulgaria taxes.
If you want to invest in Bulgaria, our Bulgarian law firm
can provide complete legal services and information about other applicable taxes in Bulgaria, such as the corporate tax
What is the Bulgarian taxation regime like?
Bulgaria is one of the European countries with the lowest corporate income tax, at 10%. When a treaty is not in force, the usual withholding tax on dividends can be 5% (or 0% in some cases) and the withholding tax in interest and royalties is 10%. The value-added tax has a standard rate of 20% and two other reduced rates of 9% and 0%. The corporate tax applicable to branches in Bulgaria is also 10%, this is not reduced under a double tax treaty. Other taxes for companies include the real property tax (from 0.01% to 0.45% of the tax value of the nonresidential and residential property), the social security tax (with the employer’s contribution between 18.92% and 19.62%), the transfer tax (on the sale of immovable property and motor vehicles).
VAT registration is mandatory for companies with a taxable turnover of more than 50,000 BGN. One of our attorneys in Bulgaria can provide more information about the Bulgaria taxes, registration requirements and can assist investors, as needed.
As far as the tax compliance for corporations is concerned, in Bulgaria, the tax year is the same as the calendar year and consolidated returns for groups of companies are not allowed (each legal entity files a separate return). The tax return and the final tax payment are to be made by the end of March (31th March) the next year. Advance tax payments are made on a monthly or quarterly basis, according to the taxable results recorded by the company in previous years.
Foreign companies that engage in business in both their country of origin as well as Bulgaria and other jurisdictions increase the potential that they are to be taxed twice or even multiple times for the same type of income. An agreement for the avoidance of double taxation is to avoid precisely this rick of double taxation by granting taxation right between the signatory states in such a manner in which the taxpayers are protected. Another important function of a double tax treaty is to prevent tax evasion. tax information exchange clauses between the signatory states apply between the two countries and they limit the manner in which some companies may take advantage of the beneficial provisions.
Strategies for tax minimization in Bulgaria
can be brought forward into the current fiscal year to allow the reduction of the taxable income
. This tax minimization strategy can be applied to gifts purchased for employees in Bulgaria
or business partners, repairs for your property in Bulgaria
, various office supplies purchased for your business and even subscriptions or memberships for various organizations.
Capital gains are the profits made after an asset has been sold. Typically, assets increase their value over time. The increase of the value is subject to a special tax, the capital gains tax. Capital gains in Bulgaria are taxed at the normal corporate income tax rate applicable in the country.
Strategic investments can also be a solution for tax minimization. By carefully evaluating existing credits, lendings and existing life insurances, business owners in Bulgaria can also make important tax savings.
Company formation in Bulgaria
We have seen that Bulgaria is an attractive location for basing a holding company and that, in general, there is no withholding tax on dividend payments. What are the general conditions for company formation and how easy is it for foreign investors to set up and run a business here? Our team of lawyers in Bulgaria describes the main types of legal entities and the incorporation requirements, so that investors may decide to open a company in Bulgaria.
The main types of business entities are the private limited liability company, the joint stock company the sole trader, the partnerships and the branch of a foreign company. The subsidiary
that can benefit from the Directive regarding the taxation of dividends is also a manner in which a foreign company can be present on the Bulgarian market but it is different from the branch. Most importantly, the subsidiary is not dependent on the parent company; it is incorporated as a Bulgarian private limited liability company and the foreign parent company owns has a minimum of 10% shareholding in the Bulgarian subsidiary. Below, we describe the main steps needed to open a subsidiary or a private limited liability company:
- - the company name: this needs to be unique, it can be checked and reserved before registration.
- - the company documents: these are the Articles of Association, the Minutes of the Meeting of Incorporation and the notarized specimen signatures of the directors.
- - the capital: for the limited liability company, the minimum share capital is only 2 BGN.
- - the registration: the company is submitted for registration with the Commercial Register; fees have to be paid.
- - the licenses: some types of companies may require additional licensing to operate in Bulgaria.
Interested in Bulgaria taxes? Contact our law firm in Bulgaria and our Bulgarian lawyers will provide all the information needed and help you with all the legal procedures.